Netherlands

Back in October 2010 we presented an analysis by Bloomberg which showed not only that courtesy of not paying taxes at its statutory rate of 35% Google was adding about $100/share to its then stock price of $607/share, but just how this was executed. Now, it is the turn of Apple, with its $110 billion in cash, to fall under the spotlight, with an extended expose in the NYT titled "How Apple Sidesteps Billions in Taxes" in which we learn that, shockingly, if you are at a table with only corporations sitting to your left and right, then you are the only person in the room paying taxes. Why - because global corporate tax "avoidance" schemes are not only perfectly legal, but they are actively encouraged, and in some cases form the backbone of a sovereign's (ahem Ireland) economic and even domestic policy, which just happens to be front and center in virtually every global corporate org chart permitting virtually the entire elimination of cash taxation at the corporate level.

Preamble:

The problem with my massive borrowing operation is that it relies on whatever I can find wherever I can get it. The best insider stuff I can get comes from ZH and nakedcapitalism, which both don't have a lot I can use in the Dutch context [hint :)]. And if I borrow heavily from them in my economic analysis I hope everyone understands.

Even the President of the EU Parliament admitted it. But just then, another plan surfaced that might speed up that scenario.

While the LTRO was heralded as a success for a month or so with the implicit money-printing-and-sovereign-reacharounds involved at the cost of senior unsecured bondholders, the sad reality is that not only are the effects of LTRO now almost entirely gone in both sovereign and financial funding costs but the massive 'injection' of freshly printed encumbrance did nothing for the real economy. In fact, as Barclays notes in these charts from the ECB bank lending survey, not only is demand weaker for credit (i.e. the consumer is pulling back in classic balance sheet recessionary style) but the banks themselves are tightening credit conditions (reducing supply) - the exact opposite of what the ECB had in mind. There is one exception to this vicious cycle - German real estate loan demand picked up modestly - we assume reflecting their flat housing market for the last 15 years and extremely low rates). Oh well, we are sure the next ECB action will be different in its banking reaction.

Pretend, from now on, that when you see this word it is written in Moldavian and needs to be translated. France and the periphery nations are screaming this word now while almost all of Europe is in recession and one that we believe will be much deeper than forecast. Consequently “growth” does not mean “growth” and the correct translation is “Inflation.” We have long said it would come to this in Europe and here we go. The troubled countries are going to beg and plead for Inflation and Germany, Austria, the Netherlands and Finland are going to resist. With Hollande the most likely next President of France you are going to see a stand-off between the socialist and the centrist countries so that a log jam will develop and the consequences of its uncoupling are anyone’s guess except that it will be likely violent and an extreme series of events. The governance of Europe on May 5 will not be what is found on May 6 and preparation for this should be high upon everyone’s list.

All you need to read and more.

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

All you need to read.

Eurostat just updated their statistics for government debt to GDP for 2011, so here is an updated graph over Belgium, Italy, Greece, Portugal, Ireland, Spain, France, UK, Netherlands, Germany and Sweden and the development of their gross government debt to GDP from 1996 to 2011. Countries not matching the new Merkozy-limit of a maximum of 3% budget deficit were Greece, Ireland, Portugal, Spain and... France. But we can forget the old euro convergence criteria of 2% deficit and at most 60% debt to GDP as instead of working back to the green 'safe' quadrant, the PIGS are heading in the exact opposite direction missing both deficit and debt convergence criteria.

Remember when Lehman or Bear Stearns was 'too small' to matter and 'subprime was contained', we we are getting same ignorant first-order analysis now with regard Spain (or more broadly-speaking Southern Europe). The whole of Southern Europe is only 6% of global GDP - how can that matter? (especially when we can eat iPads?) Michael Cembalest, of JPMorgan, provides some much needed sense on why these small countries pack a large disruption risk punch for global markets and economies. By breaking down the world into a few categories of disruption risk, the JPM CIO notes that the southern strain of Eurovirus has a much larger non-proportional impact thanks to transmission risk via its significantly greater share of sovereign and bank debt relative to the world and how these debts are financed. The transmission risk to the much-larger Northern Europe is material. We are already seeing Germany's new orders from within the Euro-zone slumping and this week's business sector surveys were very weak. As Cembalest concludes, from an alien's perspective, Earth may be able to outrun the collapse in Europe’s periphery if the ECB keeps printing money and the IMF increases its firewall, but it’s not going to be easy.

All you need to read.

It' quiet out there... Too quiet, as everyone is awaiting the most important earning number of the quarter - that of Apple. Everything else is secondary. Here is how the secondary data is driving the market so far in the trading session.

Here is the point; Bernanke thinks he can deal with this falling growth outlook and a deleveraging consumer by adding to QE to keep rates very low. I am not sure it will work and if it doesn’t yields could start to rise and the more he throws at it the more yields actually rise as vigilantes will fear pent up inflationary pressures. This is a potential disaster for central bankers and at some point the impact of QE may be proven limited. When it is the central banks will have shot the last bullet. Why is no one discussing this?

Following yesterday's disastrous European economic data which basically missed everything, it was time for a Spanish Bill auction to fix everything, same as always (if only this time there was no surge in some German confidence index). Below is a recap of all of today's ECB cash recycling operations, aka auctions, which have given the overnight futures an uplifted. Still, we wonder why: the yields on all were higher across the board, which in turn means that sovereign funding is getting increasingly unsustainable.

As usual the market remains on tenterhooks for its next fix of Central Bank largesse and the following 11 days provide some rather large potholes for those addicted to the sweet nectar of freshly printed extreme monetary policy. Citi's Steven Englander provides some much-needed reality checking on what the market is expecting and what the FOMC/ECB might deliver, and all importantly, what the implications for risk-assets in general will be. The possibility of misunderstood language at the FOMC meetings seems very high even as the announcement of additional measures remains unlikely and perhaps more notably the Euro has sold off sharply when the ECB does not present a policy response to rapidly deteriorating market conditions - especially in light of the implicit tightening we have seen in Euro-zone aggregate rates. Rock meet hard-place.